SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended December 31, 1998

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from to

                           Commission File No.: 1-5270

                              SOFTNET SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

              New York                                 11-1817252
   --------------------------------        ---------------------------------
   (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

650 Townsend Street, Suite 225, San Francisco, CA          94043
-------------------------------------------------      --------------
   (Address of principal executive offices)              (Zip Code)

Registrant's telephone number, including area code:  (415) 365-2500

                    520 Logue Avenue, Mountain View, CA 94043
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                    Yes X    No
                                       ---     ---

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

              Class                            Outstanding at January 31, 1998
  -------------------------------             --------------------------------
         Common stock, par                                8,785,253
       value $.01 per share                     

<PAGE> 

SOFTNET SYSTEMS, INC.

                                      INDEX




PART I         FINANCIAL INFORMATION

     Item 1.   Financial Statements (Unaudited)

               Condensed Consolidated Balance Sheets as of December 31, 1998 and
               September 30, 1998

               Condensed  Consolidated  Statements of  Operations  for the three
               months ended December 31, 1998 and 1997

               Condensed  Consolidated  Statements  of Cash  Flows for the three
               months ended December 31, 1998 and 1997

               Notes to Condensed Consolidated Financial Statements

     Item 2.   Management's Discussion  and Analysis of  Financial Condition and
               Results of Operations


PART II        OTHER INFORMATION

     Item 6.   Exhibits and Reports on Form 8-K


<PAGE>
                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                      Condensed Consolidated Balance Sheets
                 As of December 31, 1998 and September 30, 1998
                        (In thousands, except share data)


                                                 December 31,     September 30,
                                                     1998              1998
                                                  ----------       -----------
                                                  (Unaudited)
       ASSETS
Current assets:
   Cash                                            $   4,329        $   12,504
   Accounts receivables, net                           3,819             3,105
   Current portion of gross 
      investment in leases                             1,239             1,579
   Inventories                                         1,195             1,345
   Prepaid expenses                                    1,146               882
                                                    --------         ---------
       Total current assets                           11,728            19,415

Restricted cash                                          800               800
Property and equipment, net                            9,880             6,523
Gross investment in leases, 
   net of current portion                              1,717             1,863
Other assets                                           1,089             1,124
Costs in excess of fair value of
   net assets acquired, net                              683               955
Net assets associated with         
   discontinued operations                             3,813             3,875
                                                    --------         ---------
                                                    $ 29,710          $ 34,555
                                                    ========         =========

       LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
   Accounts payable and accrued expenses            $ 10,862          $  9,423
   Current portion of long-term debt                   1,855             1,821
   Current portion of capital leases                     913               632
   Deferred revenue                                      173               100
                                                    --------         ---------
       Total current liabilities                      13,803            11,976
                                                    --------         ---------

Long-term debt, net of current portion                 9,430            10,236
                                                    --------         ---------

Capital lease obligations, 
   net of current portion                                518               327
                                                    --------         ---------

Commitments and contingencies

Redeemable convertible preferred
   stock, $.10 par value 25,000 shares
   authorized, 17,877 shares issued
   and outstanding                                    15,754            18,187
                                                    --------         ---------

Shareholders' deficit:
   Preferred stock, $.10 par value,
      3,975,000 shares authorized,
      none issued and outstanding                          -                 -
   Common stock, $.01 par value, 
      25,000,000 shares authorized,
      8,631,087 and 8,191,550 shares
      outstanding, respectively                           86                82
   Deferred stock compensation                          (303)             (188)
   Capital in excess of par value                     46,653            43,700
   Accumulated deficit                               (56,231)          (49,765)
                                                    --------         ---------
       Total shareholders' deficit                    (9,795)           (6,171)
                                                    --------         ---------
                                                    $ 29,710          $ 34,555
                                                    ========          ========



              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.



<PAGE>


                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                 Condensed Consolidated Statements of Operations
              For the Three Months Ended December 31, 1998 and 1997
                      (In thousands, except per share data)
                                   (Unaudited)



                                                     1998              1997
                                                   ---------        ----------

Net sales                                           $  4,296          $  2,875
Cost of sales                                          2,967             2,249
                                                   ---------        ----------
   Gross profit                                        1,329               626
                                                   ---------        ----------

Operating expenses:
   Selling                                             3,009               557
   Engineering                                         1,146               581
   General and administrative                          2,862             1,178
   Amortization of goodwill
      and transaction costs                              322               322
                                                   ---------        ----------
       Total operating expenses                        7,339             2,638
                                                   ---------        ----------

Loss from continuing operations                       (6,010)           (2,012)

Other income (expense):
   Interest expense                                     (569)             (330)
   Other income                                          217                72
                                                   ---------        ----------

Loss from continuing operations
   before income taxes                                (6,362)           (2,270)

Provision for income taxes                                 -                 -
                                                   ---------        ----------

Loss from continuing operations 
   before discontinued operations                     (6,362)           (2,270)

Income (loss) from discontinued operations               139              (108)
                                                   ---------        ----------

Net loss                                            $ (6,223)        $  (2,378)
                                                   =========        ==========

Preferred dividends                                     (243)                -
                                                   ---------        ----------

Net loss applicable to common shares                $ (6,466)         $ (2,378)
                                                   =========        ==========

Basic and diluted earnings (loss) per share:
   Continuing operations                           $   (0.76)         $  (0.33)
   Discontinued operations                              0.02             (0.01)
   Preferred dividends                                 (0.03)                -
                                                   ---------        ----------
   Net loss applicable to common shares            $   (0.77)        $   (0.34)
                                                   =========        ==========

   Shares used to compute basic and
      diluted earnings (loss) per share                8,374             6,941
                                                   ---------        ----------











              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.



<PAGE>
                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                 Condensed Consolidated Statements of Cash Flows
              For the Three Months Ended December 31, 1998 and 1997
                                 (In thousands)
                                   (Unaudited)
                                                           1998          1997
                                                       ----------    ----------
Cash flows from operating activities:
   Net loss                                             $  (6,223)    $  (2,378)
     Adjustments to reconcile net loss to 
     net cash used in operating activities:
       (Income) loss from discontinued operations            (139)          108
       Depreciation and amortization                          850           469
       Amortization of deferred stock compensation             30             -
       Provision for bad debts                                 60            10
       Changes in operating assets and liabilities:
         Accounts receivable                                 (774)          270
         Gross investment in leases                           486           244
         Inventories                                          150          (102)
         Prepaid expenses                                    (264)         (152)
         Accounts payable and accrued expenses              1,439           439
         Deferred revenue                                      73           312
                                                       ----------    ----------
Net cash used in operating 
    activities of continuing operations                    (4,312)         (780)
                                                       ----------    ----------
Net cash provided by operating activities 
    of discontinued operations                                222            54
                                                       ----------    ----------
Cash flows from investing activities:
   Purchase of property and equipment                      (3,084)          (76)
   Other                                                     (100)            -
                                                       ----------    ----------
Net cash used in investing activities
    of continuing operations                               (3,184)          (76)
                                                       ----------    ----------
Net cash used in investing activities
    of discontinued operations                                (12)          (26)
                                                       ----------    ----------
Cash flows from financing activities:
   Repayment of long-term debt                               (439)         (424)
   Borrowings under revolving credit note                   8,697         2,017
   Payments under revolving credit note                    (9,030)         (475)
   Additional costs of issuance of 
      convertible preferred stock                             (54)            -
   Net proceeds from issuance of
      convertible preferred stock                               -         4,600
   Restricted cash                                              -        (4,600)
   Proceeds from exercise of warrants                         190            42
   Capitalized lease obligations paid                        (245)          (15)
                                                       ----------    ----------
Net cash provided by (used in) financing
    activities of continuing operations                      (881)        1,145
                                                       ----------    ----------
Net cash used in financing activities of
    discontinued operations                                    (8)         (304)
                                                       ----------    ----------
Increase (decrease) in cash                                (8,175)           13
Cash, beginning of period                                  12,504            37
                                                       ----------    ----------
Cash, end of period                                      $  4,329     $      50
                                                       ==========    ==========
Cash paid during the period for:
   Interest                                              $    308       $   420
   Income taxes                                                 -             -

Supplemental non-cash transactions
   Common stock issued for the 
      conversion of preferred stock                         2,600             -
   Common stock issued for the
      conversion of subordinated notes                          -           208
   Value assigned to common warrants
      issued upon the issuance of
      preferred stock                                           -           435
   Preferred dividends paid with the issuance of -
     Additional preferred stock                               221             -
     Common stock                                              22             -
   Equipment acquired by capital lease                        717             -
   Deferred compensation associated with
      the issuance of common stock options                    146             -

              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.
<PAGE>
                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
              Notes to Condensed Consolidated Financial Statements

1.   Basis of Presentation

The  financial  information,  except for the balance  sheet as of September  30,
1998,  included  herein is unaudited;  however,  such  information  reflects all
adjustments  (consisting  solely of normal recurring  adjustments) which are, in
the opinion of management,  necessary for a fair  presentation  of the condensed
consolidated  statements of financial  position,  results of operations and cash
flows as of and for the interim periods ended December 31, 1998 and 1997.

The Company's  annual report on Form 10-K/A for the fiscal year ended  September
30, 1998, as filed with the Securities and Exchange  Commission,  should be read
in  conjunction  with  the   accompanying   Condensed   Consolidated   Financial
Statements.  The Condensed  Consolidated  Balance Sheet as of September 30, 1998
was derived from the Company's audited Consolidated Financial Statements.

The results of operations for the three months ended December 31, 1998 are based
in part on  estimates  that may be subject to year-end  adjustments  and are not
necessarily indicative of the results to be expected for the full year.

The financial  statements for the three months ended December 31, 1997 have been
restated   for   the   effects   of   the   discontinued   operations   of   the
telecommunications  segment (see Note 2).  Certain  reclassifications  have been
made to conform with the current presentation.

2.       Discontinued Operations

In July 1998,  the Company's  Board of Directors  adopted a plan to  discontinue
operations  of its  telecommunications  segment.  This  segment  consists of the
Company's wholly owned subsidiary Kansas  Communications,  Inc.  ("KCI"),  along
with KCI's Milwaukee  operations  purchased from Executone  Management  Systems,
Inc. Accordingly,  the operating results of the telecommunications  segment have
been segregated from continuing  operations and reported as a separate line item
on the statement of operations.  The assets and  liabilities of such  operations
have been reflected as a net asset.

On February 12, 1999, KCI was sold to Convergent  Communications  Services, Inc.
for an  aggregate  purchase  price of  approximately  $6.5  million,  subject to
adjustment in certain events.  Proceeds from the sale consist of cash, notes and
shares of Convergent Communications Services, Inc.'s parent company common stock
(see Note 6).

Operating results of the discontinued  telecommunications segment are as follows
for the three months ended December 31 (in thousands):
                                                        1998             1997   
                                                     ---------        --------- 

     Revenues                                          $ 3,633          $ 3,949 
     Income (loss) before income taxes                     194             (108)
     Provision for income taxes                            (55)               - 
     Net income (loss)                                     139             (108)

Assets and  liabilities of the  discontinued  telecommunications  segment are as
follows (in thousands):

                                                   December 31,    September 30,
                                                       1998             1998
                                                    ----------        --------- 
     Current assets:
       Cash                                          $       -        $       - 
       Accounts receivable, net                          1,847            1,734 
       Inventories                                       2,490            2,248 
       Prepaid expenses                                     99               36 
                                                     ---------        --------- 
                                                         4,436            4,018 
     Property, plant and equipment, net                    398              427 
     Goodwill, net                                       1,639            1,663 
     Other noncurrent assets                                22               21 
                                                     ---------        --------- 
                                                        $6,495           $6,129 
                                                     =========        ========= 
     Current liabilities:                                                       
       Accounts payable                                 $1,710           $1,582 
       Current portion, capital                                                 
          lease obligation                                  30               32 
       Deferred revenue                                    901              593 
                                                     ---------        --------- 
                                                         2,641            2,207 
     Capital lease obligation,                                                  
       net of current portion                               41               47 
                                                     ---------        --------- 
                                                        $2,682           $2,254 
                                                     =========        ========= 
     Net assets associated with                                                 
       discontinued operations                          $3,813           $3,875 
                                                     =========        ========= 
3.       Debt                                        

Long-term debt is summarized as follows (in thousands):

                                                   December 31,    September 30,
                                                         1998             1998  
                                                    ----------       ---------- 
     Bank Debt                                        $  6,667        $   7,416 
     Convertible subordinated notes                      3,951            3,951 
     Other                                                 667              690 
                                                    ----------       ---------- 
                                                        11,285           12,057 
     Less current portion                               (1,855)          (1,821)
                                                    ----------       ---------- 
                                                      $  9,430         $ 10,236 
                                                    ==========       ========== 
                                                     
4.       Redeemable Convertible Preferred Stock

On November 23, 1998 and November 24, 1998,  the Company  issued an aggregate of
413,018  shares of common  stock  pursuant to the  conversion  of the  remaining
3,100.78  shares of the Company's  outstanding  Series A  Convertible  Preferred
Stock. The Series A Convertible  Preferred Stock,  including accrued  dividends,
was converted into common shares at the conversion price of $7.56 per share.

During the quarter ended December 31, 1998,  the Company  declared a dividend on
both its  outstanding  Series B Convertible  Preferred Stock and its outstanding
Series C  Convertible  Preferred  Stock,  payable on  December  31,  1998 to the
respective stockholders of record at the close of business on December 28, 1998.
Dividends for the Series B Convertible Preferred Stock, payable at a rate of 5%,
were paid at the Company's option in the form of 126.56 additional shares of the
Company's  Series B  Preferred  Stock.  Dividends  for the Series C  Convertible
Preferred  Stock,  payable at a rate of 5%, were paid at the Company's option in
the  form of 94.14  additional  shares  of the  Company's  Series C  Convertible
Preferred Stock.

5.       Stock Options and Warrants

The following table summarizes the outstanding  options and warrants to purchase
shares of common stock for the three months ended December 31, 1998:
<TABLE>
<CAPTION>

                                                                                                       Outstanding
                                       Outstanding Options          Outstanding Warrants          Options and Warrants
                                    ---------------------------    ------------------------     --------------------------
                                                     Weighted                     Weighted                                  
                                                     Average                      Average                       Weighted
                                                    Exercise                     Exercise                       Average
                                         Shares       Price           Shares       Price           Shares    Exercise Price
                                       ---------     --------          -------    --------       ---------   --------------
<S>                                    <C>           <C>               <C>        <C>            <C>           <C>     
Outstanding as 
   of September 30, 1998               1,370,125     $   7.42          832,399    $   9.27       2,202,524     $   8.12
                                       ---------     --------          -------    --------       ---------     --------
     Granted                              65,000     $   7.38              -           -            65,000     $   7.38
     Exercised                               -            -            (26,519)   $   7.39         (26,519)    $   7.39
     Canceled                            (20,700)    $   6.88             (905)   $   6.63         (21,605)    $   6.87
Outstanding as 
   of December 31, 1998                1,414,425     $   7.45          804,975    $   9.33       2,219,400     $   8.13
                                       ---------     --------          -------    --------       ---------     --------
</TABLE>


6.       Subsequent Events

On  January  12,  1999,  the  Company  executed  an  agreement  with a group  of
institutional  investors  whereby the Company  issued $12 million in convertible
subordinated  loan notes.  These notes bear an interest  rate of 9% per year and
mature in 2001. These notes are convertible into the Company's common stock with
an  initial  conversion  price of  $17.00  per  share  until  July 1,  1999 and,
thereafter,  at the lower of $17.00  per share and the lowest  five-day  average
closing bid price of the Company's common stock during the 30-day trading period
ending one day prior to the applicable conversion date. In connection with these
notes,  the Company issued to these investors  warrants to purchase an aggregate
of 300,000 shares of the Company's common stock.  These warrants,  which have an
exercise price of $17 per share, expire in 2003.

On  February  5,  1999,  a  single  holder  of  the  Company's  9%   Convertible
Subordinated  Debentures  due September  2000  converted a debenture in the face
amount of $401,516 into 59,483 shares of the  Company's  common stock.  These 9%
debentures have a conversion price of $6.75 per share of common stock.

On  February  9,  1999,  the  Company  completed  the  purchase  of  Intelligent
Communications,  Inc. The purchase  price was comprised of: (i) a cash component
of  $500,000,  less  payment  of  certain  expenses,  paid  at  closing;  (ii) a
promissory note in the amount of $1.0 million due one year after closing;  (iii)
a  promissory  note in the amount of $2.0  million due two years after  closing;
(iv) the issuance of 500,000  shares of the Company's  common stock  (adjustable
upwards after one year in certain circumstances);  and (v) a demonstration bonus
of $1.0 million  payable in cash or shares of the Company's  common stock at the
Company's  option within one year after closing if certain  conditions  are met.
Approximately  $300,000  of the $1.0  million  note is payable in cash or in the
Company's common stock at the Company's  option,  while the balance of this note
is  payable  in cash or in the  Company's  common  stock  at the  option  of the
holders.  The entire  amount of the $2.0  million note is payable in cash or the
Company's common stock at the option of the Company.

On  February  12,  1999,  Kansas  Communications,  Inc.  was sold to  Convergent
Communications  Services,  Inc.  ("Convergent  Communications") for an aggregate
purchase price of  approximately  $6.5 million  subject to adjustment in certain
events.  Convergent  Communications  paid $100,000 in cash in November 1998 upon
execution  of the letter of intent to  purchase  and paid the  remainder  of the
purchase  price on the closing date as follows:  (i) $1.4 million in cash;  (ii)
approximately 50,000 shares of Convergent  Communications' parent company common
stock with an agreed value of approximately $500,000 ($10.00 per share); (iii) a
promissory  note in the amount of $2.0 million  which is payable on July 1, 1999
and bears  simple  interest  at the rate of eleven  percent  per  annum;  (iv) a
promissory  note in the amount of $1.0 million which is payable on the date that
is 12 months following the closing date and bears simple interest at the rate of
eight percent per annum;  and (v) a promissory note in an amount of $1.5 million
which is payable  on the date which is 12 months  following  the  closing  date,
bears simple  interest at the rate of eight  percent per annum and is subject to
mandatory prepayment in certain events.


Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

General

This  Form 10-Q  contains  forward-looking  statements  that  involve  risks and
uncertainties.  The actual results of SoftNet Systems, Inc. and its subsidiaries
could differ significantly from those set forth herein. Factors that could cause
or  contribute  to such  differences  include,  but are not  limited  to,  those
discussed in "Factors Affecting the Company's Operating Results" as set forth in
the  Company's  annual  report on Form 10-K/A for the year ended  September  30,
1998, as filed with the Securities and Exchange  Commission,  and  "Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations"  as
well as those discussed elsewhere in this quarterly report. Statements contained
herein that are not historical  facts are  forward-looking  statements  that are
subject to the safe harbor created by the Private  Securities  Litigation Reform
Act of 1995. Words such as "believes",  "anticipates",  "expects", "intends" and
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying  such  statements.  A number of important
factors  could  cause our actual  results  for fiscal  1999 and beyond to differ
materially  from  past  results  and  those  expressed  in  any  forward-looking
statements  made by us, or on our behalf.  We undertake no obligation to release
publicly the results of any revisions to these  forward-looking  statements that
may be made to  reflect  events or  circumstances  after  the date  hereof or to
reflect the occurrence of unanticipated events.

The following  discussion  of our financial  condition and results of operations
should  be read  in  conjunction  with,  and is  qualified  in its  entirety  by
reference  to, our  Consolidated  Financial  Statements  and the  related  Notes
thereto  appearing  in our  annual  report  on Form  10-K/A  for the year  ended
September 30, 1998, as filed with the Securities and Exchange Commission and our
Condensed  Consolidated Financial Statements and related Notes thereto appearing
elsewhere in this  quarterly  report.  Our fiscal year ends September 30 and the
first quarter of the fiscal year ends  December 31.  "Fiscal 1999" refers to the
twelve months ending September 30, 1999 with similar  references to other twelve
month periods ending September 30.

Overview

During fiscal 1998, we made a strategic  decision to focus on becoming,  through
our  wholly-owned  subsidiary,  ISP Channel,  Inc. ("ISP  Channel"),  (which was
formerly known as MediaCity World, Inc.), the dominant  cable-based  provider of
high-speed Internet access, as well as of other digital communications services,
to  homes  and  businesses  in  the  franchise   areas  of  certain  small-  and
medium-sized  cable systems.  As part of this new focus,  on February 9, 1999 we
completed  the purchase of  Intelligent  Communications  Inc.,  the former Xerox
Skyway  Network.  We  believe  that  integrating  this new  technology  into our
existing business plan will allow us to cost effectively provide our ISP Channel
service to  smaller  systems in more  remote  areas as well as to certain  other
markets including apartment buildings,  hotels,  hospitals, and schools, thereby
decreasing our cost basis and increasing our potential market size. Also in line
with  this  strategy,   we  determined  to  divest  our  two  other  businesses:
Micrographic  Technology Corporation ("MTC"), a wholly owned subsidiary offering
document management solutions, and Kansas Communications, Inc. ("KCI"), a wholly
owned  subsidiary  which  sells and  services  telephone  systems,  third  party
computer hardware and application oriented peripheral products such as voicemail
and  video  conferencing  systems.  On  February  12,  1999,  we  completed  the
divestiture  of KCI. In addition,  on November 5, 1998, we entered into a letter
of intent for the sale of MTC.  Since July 27, 1998,  we have  reclassified  and
reported KCI in discontinued  operations but, at this time, pending  shareholder
approval of the sale of MTC (which with KCI, comprised  substantially all of our
assets),  we continue to classify and report MTC as a continuing business though
it is our current intent to conclude its sale within the next twelve months.

ISP Channel and Intelligent  Communications We began providing Internet services
following our acquisition of ISP Channel in June 1996. While we seek to maintain
and build the traditional  dial-up  Internet  access  business  acquired at, and
built up since,  that time,  our  primary  objective  is to become the  dominant
provider  of  high-speed  Internet  access  via the  existing  cable  television
infrastructure  to homes and  businesses  in the  franchise  areas of small- and
medium-sized cable television  systems.  We commenced  marketing this high-speed
service, using cable modems, to select cable operators and potential subscribers
in March 1998.  However,  we believe that, as a result of our limited  financial
resources,  we have not fully  implemented  our marketing  strategies,  and this
business has, to date, generated only nominal revenues.

On February 9, 1999,  we completed the purchase of  Intelligent  Communications.
The purchase  price for this  acquisition  is described  below in Liquidity  and
Capital Resources.  Through use of its proprietary satellite system, Intelligent
Communications   currently  provides  two-way  Internet  connectivity  to  local
Internet service providers  ("ISPs"),  school systems and businesses,  primarily
located in remote and rural areas. Intelligent  Communications' VSAT (very small
aperture terminals) network allows  connectivity  throughout the 48 lower states
as well as in southern Canada and southern  Alaska.  Intelligent  Communications
offers a wide range of Internet services based on its proprietary T1Plus product
that  presently  offers up to 2 Mbps data  transfer  rates.  It is our intention
that, while Intelligent  Communications  will continue to market its services to
its current market business,  it will also provide ISP Channel with the in-house
ability to bypass  many of the high cost  terrestrial  telephone  links that ISP
Channel has  historically  used to connect the cable head-ends of its affiliated
cable operators to the network operations center of ISP Channel.  As a result of
the  Intelligent   Communications   acquisition,   we  anticipate   recording  a
significant  amount of goodwill in the second  quarter of fiscal 1999 which will
adversely affect our earnings and profitability  for the foreseeable  future. If
the amount of such  recorded  goodwill is increased or we have future losses and
are unable to demonstrate our ability to recover the amount of goodwill recorded
during such time periods,  the period of amortization could be shortened,  which
may further increase annual  amortization  charges.  In such event, our business
and financial condition could be materially and adversely affected.

ISP Channel  Affiliates As of January 31, 1999, we had contracts for ISP Channel
service with 29 cable operators representing 122 cable systems and approximately
1.5 million homes passed.  Twenty of these systems,  representing  approximately
207,000 homes passed,  have been equipped and have begun  offering our services.
In addition, we have letters of intent with ten cable operators, representing 39
systems,  and  approximately  359,000 homes passed.  As of January 31, 1999, the
Company had approximately 1,850 residential and business  subscribers to our ISP
Channel service.

In order to expand our cable-based  Internet subscriber base  significantly,  we
expect to aggressively pursue affiliation  agreements with cable operators which
will provide us with the exclusive right to market cable-based Internet services
to existing cable television  subscribers in such cable operators'  systems.  We
anticipate  that this  policy of rapid  deployment  will  result in  substantial
capital expenditures,  operating losses and negative cash flow in the near term.
While we believe that we currently have  sufficient  cash and financing  sources
available to fund our operations through 1999, we cannot assure,  however,  that
we will be able to access  additional  capital to finance  our  strategy  in the
longer  term or to  implement  our  strategy  or achieve  positive  cash flow or
profitability in a timely fashion, or at all.

ISP Channel  Revenue  Sources In  providing  its Internet  services,  we receive
revenue from the provision of (i) cable modem-based Internet access services and
(ii) traditional dial-up Internet access services.  Currently, we or, in certain
cases,  our local  cable  affiliate,  typically  charge  new  cable  modem-based
Internet access subscribers a one-time connection fee of $99, which fee includes
modem installation but excludes any required  modification of the existing cable
television  connection which is usually  performed by the local cable affiliate.
Thereafter, each subscriber pays a monthly access fee, which is currently as low
as $39 per month and it is our  expectation  that such rates will  decrease over
time.  We  anticipate  that we will  purchase a majority of cable modems used by
subscribers,  who will be charged a nominal  lease or rental  charge.  We do not
charge new dial-up  subscribers a connection fee, but do charge a monthly access
fee of approximately $20.

In addition to  connection  fees and monthly  access  fees,  we intend to pursue
additional  revenue  opportunities  from Internet  advertising,  e-commerce  and
Internet-based  telephony.  We also  intend to pursue  long  distance  telephone
services and telephony  debit and credit cards.  Intelligent  Communications  is
also anticipated to generate continuing revenue from the sale of VSAT service.

In the future, as digital set-top boxes become available and are introduced into
our affiliated  cable  systems,  we expect to charge those  subscribers  monthly
access fees comparable to those now charged to traditional dial-up  subscribers.
We also  expect to charge  customers  a set-top  connection  fee to help  defray
installation expenses.

For  cable-based  Internet  services,  we typically  share 25% of monthly access
revenues with cable  affiliates for the first 200 subscribers in each system and
50% thereafter. For other services, such as Internet-based telephony, e-commerce
and  advertising,  we expect to share between 25% and 50% of these revenues with
the cable affiliates. We expect to retain all revenue from cable modem lease and
rental income.  Depending on competitive  market  conditions,  these pricing and
revenue sharing parameters could change over time.

Cost of  Services  Costs to us include  installation  costs,  network  and cable
operation  costs  and  personnel  and  other  costs.  Commissions  paid to cable
affiliates vary by type of connectivity and size of contract.

Installation  costs are  expected  to vary by type of  connectivity  and type of
customer.  We  charge  new  subscribers  a one time fee to  defray  the costs of
installation,   which   includes  labor  and  overhead.   While   currently  the
installation  fee does not cover the entire cost  incurred by us, we expect over
time  that  installation   costs  will  decline  as  cable  modems  become  more
standardized  and are eventually  bundled as standard  equipment in new personal
computers.

Other  network  costs  include  the  cost of  connection  to the  public  switch
telephone  network.  Such  connections  are required,  among other  reasons,  to
service our dial-up  customers as well as to provide those cable modem customers
located on a one-way  cable  system,  the return path (or upstream  link) to our
equipment located at the cable operator's system hub (or headend).  In addition,
we incur costs associated with leasing telecommunications capacity such as fiber
where such capacity is used,  among other  things,  to link our equipment at the
cable system  headend back to our network  operations  center in Mountain  View,
California.  We anticipate that the  utilization of Intelligent  Communications'
network  as  a  substitute  for  third  party  terrestrial  links  will  provide
significant cost savings to us as it grows. There are two major cost benefits to
us in using Intelligent  Communications'  VSAT capacity to supplement or replace
our current landline-based communications infrastructure.  First, for downstream
Internet traffic, it enables us to simultaneously broadcast data from one single
source to our entire network of  headend-based  receivers  which, in conjunction
with  other  factors  including   "caching"  produces   significant   efficiency
improvement over comparable  landline systems.  Second, for upstream traffic, it
permits us to  allocate  the  necessary  capacity  required  by each  headend in
smaller  increments (and consequently  lower cost) than would be available using
terrestrial links, such as T1 lines.

Sales,  Marketing and Operating Expenses Sales, marketing and operating expenses
include  the  costs  of  our  cable  affiliate   program,   maintenance  of  our
infrastructure,  customer care, content and new business development in addition
to sales and marketing expenses.

Stock Option Compensatory Expenses From October 1998, we have granted to certain
employees an aggregate of 1,345,500  incentive and  non-qualified  stock options
under our 1998 Stock  Incentive  Plan at a weighted  average  price of $8.46 per
option.  This plan, and therefore the stock options granted under this plan, are
subject to shareholder  approval at our forthcoming annual meeting.  If the fair
market value of our common stock at the date of such approval  exceeds the grant
price of those  options  granted  under the plan,  then we must  recognize  this
excess as a  compensation  charge.  In this  event,  we will  record  the charge
ratably over the vesting period of the stock options with a catch-up  adjustment
for  that  period  from the  date of  grant  to the  date of plan  approval.  To
illustrate: if the fair market value of our common stock were $17 at the date of
approval of the plan, we would  recognize a charge to earnings of  approximately
$718,000 per quarter until the underlying options were fully vested.

Capital  Expenditures  In order to pursue our business  plan, we expect to incur
significant  capital  expenditures  to provide  our turnkey  solution  for cable
operators, principally relating to the installation of headend equipment and the
purchase of customer premise equipment such as cable modems. The cost of headend
equipment has averaged  $45,000 per headend for the 20 systems  through which we
currently provides service.  The cost of cable modems,  currently  approximately
$179 to  $349,  is  expected  to  decline  over  time as  economies  of scale in
production  and new market  entrants in the cable modem market push down prices.
However,  we  recognize  that,  in line with  experience  in other  subscription
service industries,  we will need to subsidize both the cost of installation and
the cable modem  equipment for the customer.  Such  expenditures,  however,  are
expected to be offset in part by the savings  resulting from decreased  costs of
installation  and prices for such  equipment as equipment  is  standardized  and
production volumes increase, respectively.

MTC We have signed a letter of intent to sell MTC.  Either through the currently
contemplated  transaction  or  otherwise,  we expect to dispose of this business
during  fiscal  1999.  MTC develops and  manufactures  sophisticated,  automated
electronic  document  management and film-based  imaging solutions for customers
with large-scale,  complex,  document-intensive requirements. MTC's hardware and
software products are based on an industry standard client-server  architecture,
providing  flexibility to connect to a wide variety of  information  systems and
produce output to various storage media,  including optical disk,  magnetic disk
and tape,  CD-ROM,  and microfilm and  microfiche,  spanning the entire document
lifecycle.  MTC's electronic and film-based  imaging hardware systems  typically
range in price between $200,000 and $1,000,000,  and may represent a significant
capital commitment by MTC's customers, leading to a lengthy sales cycle of up to
24 months. Accordingly, MTC's operating results may fluctuate significantly from
period to period.

Results of operations for the First Quarter of Fiscal 1999 compared  to the same
period in Fiscal 1998

Consolidated net sales increased $1.4 million, or 49.4%, to $4.3 million for the
three months ended  December 31, 1998,  as compared to $2.9 million for the same
period in 1997.  For the three  months ended  December  31,  1998,  sales in the
document  management segment increased $1.2 million,  or 44.9%, to $3.9 million,
as  compared  to $2.7  million  for the same  period in 1997.  For the  document
management  segment,  sales of its computer output microfiche  equipment ("COM")
increased  $836,000 to $994,000 for the three months ended December 31, 1998 and
sales of its  consumable  product  lines,  such as spare parts and film supplies
increased $323,000 to $2.3 million for the three months ended December 31, 1998.
Domestic COM sales  contributed  $474,000,  or 47.7%, of the total COM sales for
the three months ended December 31, 1998,  representing  an increase of $472,000
in domestic COM sales,  as compared to the same period in 1997. Net sales in the
Internet segment increased $229,000, or 106.5%, to $444,000 for the three months
ended  December 31,  1998,  as compared to $215,000 for the same period in 1997.
Net sales associated with the Internet  segment's cable based services increased
$223,000 to $270,000 for the three months ended  December 31, 1998,  as compared
to $47,000 for the same period in 1997. Net sales  associated with the segment's
non-cable  based  dial-up and  business-to-business  Internet  access  offerings
increased  $6,000 to $174,000  as  compared  to $168,000  for the same period in
1997.

Consolidated gross profit increased $703,000, or 112.3%, to $1.3 million for the
three  months  ended  December  31,  1998,  as compared to $626,000 for the same
period in 1997, with profit margins  increasing to 30.9% from 21.8% for the same
period in 1997. The percentage  increase is primarily related to the increase in
the document management segment's COM sales, which historically have contributed
the highest  product  profit  margins.  For the three months ended  December 31,
1998, gross profit in the document  management  segment increased  $635,000,  or
96.7%,  to $1.3  million,  as compared to gross  profit of $657,000 for the same
period in 1997.  For the three  months ended  December  31,  1998,  gross profit
margins in the document  management  segment  increased to 33.5%, from 24.7% for
the same period in 1997. Gross profit in the Internet segment  increased $68,000
to $37,000  for the three  months  ended  December  31,  1998,  as compared to a
gross   deficit  of  $31,000  for the  same   period  in 1997.    For  the three
months ended December 31, 1998,  gross profit  margins for the Internet  segment
were 8.2%.

Operating expenses (selling, engineering,  general and administrative) increased
$4.7 million to $7.0 million for the three  months ended  December 31, 1998,  as
compared to $2.3 million for the same period in 1997.  The increase in operating
expenses is entirely related to the increase in the administrative, engineering,
sales and marketing efforts  associated with the Internet  segment's ISP Channel
cable based service  offering.  The expenses  associated  with these  operations
increased $4.8 million for the three months ended December 31, 1998, as compared
to the same period in 1997.  This  increase  includes  our  corporate  operating
expenses,  as these  expenses are now directly  related to the operations of the
Internet  segment,  given  management's  strategic  refocusing  towards  the ISP
Channel cable based service offering.

Amortization   expense   associated  with  goodwill  remained  constant  in  the
comparative periods.

Consolidated  interest expense increased $239,000, or 72.4%, to $569,000 for the
three  months  ended  December  31,  1998,  as compared to $330,000 for the same
period in 1997.  Interest expense associated with the operations of the Internet
segment  increased  $291,000 to $296,000 for the three months ended December 31,
1998, as compared to $5,000 for the same period in 1997,  primarily due to lease
financing  associated  with the capital  expansion  needs of the  segment's  ISP
Channel cable based  service  offering.  Interest  expense  associated  with our
outstanding indebtedness decreased by $52,000,  primarily as the result of lower
outstanding bank debt.

We made no provision  for income  taxes for the three months ended  December 31,
1998, as a result of our net operating loss carry-forward.

We  recognized   income  from  operations  with  respect  to  our   discontinued
telecommunications  segment of $139,000 for the three months ended  December 31,
1998,  as compared to a loss from  operations of $108,000 for the same period in
1997.

For the three months ended  December 31, 1998,  we had a net loss  applicable to
common shares of $6.5 million,  or a loss per share of $0.77,  compared to a net
loss of $2.4 million for the same period in 1997, or a loss per share of $0.34.

Liquidity and Capital Resources

Over the past year,  our growth has been funded through a combination of private
equity, bank debt and lease financings. As of December 31, 1998, the Company had
approximately  $4.3 million of  unrestricted  cash. In addition,  on January 12,
1999, we executed an agreement with a group of institutional  investors  whereby
we issued $12.0 million in convertible subordinated loan notes. These notes bear
an interest rate of 9% per year and mature in 2001.  These notes are convertible
into our common stock with an initial conversion price of $17.00 per share until
July 1, 1999 and,  thereafter,  at the lower of $17.00  per share and the lowest
five-day average closing bid price of our common stock during the 30-day trading
period  ending one day prior to the  applicable  conversion  date. In connection
with these notes, we issued to these investors warrants to purchase an aggregate
of 300,000 shares of our common stock.  These  warrants,  which have an exercise
price of $17 per share,  expire in 2003.  We have also  received a secured  $3.0
million loan from a financial lender and are in negotiations  with a further two
lenders  with  regard to a $7.5  million  senior  secured  credit  facility.  We
believe,  as a result  of  this,  that we  currently  have  sufficient  cash and
financing  commitments  to meet our  funding  requirements  over the next  year.
However,  we experienced and continue to experience  negative  operating margins
and negative cash flow from  operations,  as well as an ongoing  requirement for
substantial additional capital investment.  We expect that we will need to raise
substantial  additional  capital to  accomplish  our business plan over the next
several years. Our future cash requirements for our business plan expansion will
depend on a number  of  factors  including  (i) the  number  of cable  affiliate
contracts, (ii) cable modem and associated costs of equipment, (iii) the rate at
which  subscribers  purchase our Internet service offering and (iv) the level of
marketing required to acquire and retain subscribers and to attain a competitive
position in the  marketplace.  In addition,  we may wish to  selectively  pursue
possible   acquisitions  of  businesses,   technologies,   content  or  products
complementary to ours in the future in order to expand our Internet presence and
achieve operating efficiencies. We expect to seek additional funding through the
sale of public or private debt and/or equity securities or through a bank credit
facility.  We expect we may raise as much as $150 million in debt and/or  equity
financing  during  fiscal  1999.  If  additional  funds are raised  through  the
issuance of equity or convertible debt securities,  the percentage  ownership of
our  shareholders  will  be  reduced,  shareholders  may  experience  additional
dilution and such securities may have rights,  preferences or privileges  senior
to those of our common stock. We can give no assurance as to the availability or
terms upon which such financing might be available.

At December  31,  1998,  our current  ratio was 0.85 to 1 with  working  capital
deficit of $2.1  million.  This  compares  with a current ratio of 1.62 to 1 and
working capital of $7.4 million at September 30, 1998.

For the three  months  ended  December  31,  1998,  cash flows used in operating
activities of continuing  operations were $4.3 million,  as compared to $780,000
for the  same  period  in 1997.  Cash  flows  used in  investing  activities  of
continuing  operations were $3.2 million for the three months ended December 31,
1998,  as compared  to $76,000  for the same period in 1997.  Cash flows used in
financing activities of continuing operations were $881,000 for the three months
ended  December  31,  1998,  as  compared to cash flows  provided  by  financing
activities of continuing operations of $1.1 million for the same period in 1997.

On  February  5,  1999,  a  single  holder  of our 9%  Convertible  Subordinated
Debentures  due  September  2000  converted  a  debenture  in the face amount of
$401,516  into 59,483 shares of our common  stock.  These 9%  debentures  have a
conversion  price of $6.75 per share.  We have also extended the maturity of our
revolving  credit  facility,  which has a  maximum  borrowing  capacity  of $9.5
million, through January 15, 2000.

Acquisition of Intelligent  Communications On February 9, 1999, we completed the
purchase of  Intelligent  Communications,  Inc. The purchase price was comprised
of: (i) a cash component of $500,000,  less payment of certain expenses, paid at
closing; (ii) a promissory note in the amount of $1.0 million due one year after
closing;  (iii) a  promissory  note in the amount of $2.0  million due two years
after  closing;  (iv)  the  issuance  of  500,000  shares  of our  common  stock
(adjustable  upwards  after  one  year  in  certain  circumstances);  and  (v) a
demonstration  bonus of $1.0  million  payable  in cash or shares of our  common
stock at our option within one year after closing if certain conditions are met.
Approximately  $300,000  of the $1.0  million  note is payable in cash or in our
common stock at our option, while the balance of this note is payable in cash or
in our common stock at the option of the holders.  The entire amount of the $2.0
million note is payable in cash or in our common stock at our option.

Sale of KCI On  February  12,  1999,  Kansas  Communications,  Inc.  was sold to
Convergent  Communications  Services, Inc. ("Convergent  Communications") for an
aggregate  purchase price of approximately $6.5 million subject to adjustment in
certain events. Convergent Communications paid $100,000 in cash in November 1998
upon execution of the letter of intent to purchase and paid the remainder of the
purchase  price on the closing date as follows:  (i) $1.4 million in cash;  (ii)
approximately 50,000 shares of Convergent  Communications' parent company common
stock with an agreed value of approximately $500,000 ($10.00 per share); (iii) a
promissory  note in the amount of $2.0 million  which is payable on July 1, 1999
and bears  simple  interest  at the rate of eleven  percent  per  annum;  (iv) a
promissory  note in the amount of $1.0 million which is payable on the date that
is 12 months following the closing date and bears simple interest at the rate of
eight percent per annum;  and (v) a promissory note in an amount of $1.5 million
which is payable  on the date which is 12 months  following  the  closing  date,
bears simple  interest at the rate of eight  percent per annum and is subject to
mandatory prepayment in certain events.

Sale of MTC On  November  5,  1998,  we agreed to sell our  document  management
business,  Micrographic  Technology  Corporation  ("MTC") to Global  Information
Distribution GmbH ("GID") for an aggregate  purchase price of approximately $5.1
million.  GID paid $100,000 as a  non-refundable  deposit upon acceptance of the
GID term sheet. GID will pay us the remaining $5.0 million at the closing.

The cash proceeds from the sale of MTC and KCI will be used in part to repay our
revolving  credit  facility  with West  Suburban  Bank. As of December 31, 1998,
there was  approximately  $4.8  million  outstanding  under this  facility.  The
balance of the proceeds  will be used to pay for  transaction  costs  associated
with the  sales of MTC and KCI and to  increase  our cash  position.  We  cannot
assure,  however,  that the sale of MTC will close on the terms  described or at
all.

Year 2000 Issues

Many  computer  programs  have been written using two digits rather than four to
define the  applicable  year.  This  poses a problem  at the end of the  century
because such computer  programs would not properly  recognize a year that begins
with "20" instead of "19".  This, in turn, could result in major system failures
or  miscalculations,  and is  generally  referred to as the "Year 2000 Issue" or
"Y2K  Issue".  We have  formulated  a Y2K Plan to address our Y2K issues and has
created a Y2K Task Force  headed by the  Director  of I/S and Data  Services  to
implement the plan. Our Y2K Plan has six phases:

1)   Organizational  Awareness - educate our employees,  senior management,  and
     the board of directors about the Y2K issue.
2)   Inventory  - complete  inventory  of  internal  business  systems and their
     relative  priority to continuing  business  operations.  In addition,  this
     phase  includes a complete  inventory of critical  vendors,  suppliers  and
     services providers and their Y2K compliance status.
3)   Assessment - assessment of internal  business systems and critical vendors,
     suppliers and service providers and their Y2K compliance status.
4)   Planning - preparing  the  individual  project  plans and project teams and
     other  required  internal and external  resources to implement the required
     solutions for Y2K compliance.
5)   Execution - implementation of the solutions and fixes.
6)   Validation - testing the solutions for Y2K compliance.

Our Y2K Plan will apply to two areas:

o    internal business systems 
o    compliance by external customers and providers

Internal Business Systems Our internal business systems and workstation business
applications  will be a primary area of focus.  We are in the unique position of
completing  the  implementation  of new  enterprise-wide  business  solutions to
replace existing manual processes and/or "home grown"  applications during 1999.
These solutions are represented by their vendors as being fully Y2K compliant We
have few, if any,  "legacy"  applications that will need to be evaluated for Y2K
compliance.

We have  completed the  Inventory and  Assessment  Phases of  substantially  all
critical internal business systems. We expect the Planning Phase to be completed
by March 31, 1999.  The  Execution  and  Validation  Phases will be completed by
August 31, 1999.  We expect to be Y2K compliant on all critical  systems,  which
rely on the calendar year before December 31, 1999.

Some  non-critical  systems  may not be  addressed  until  after  January  2000.
However,  we believe such systems will not cause significant  disruptions in our
operations.

Compliance  by External  Customers  and  Providers  We are in the process of the
inventory and assessment phases of our critical suppliers, service providers and
contractors  to  determine  the  extent  to  which  our  interface  systems  are
susceptible to those third parties'  failure to remedy their own Y2K issues.  We
expect  that  assessment  will be  complete  by May  1999.  To the  extent  that
responses to Y2K readiness are  unsatisfactory,  we intend to change  suppliers,
service  providers or contractors to those that have demonstrated Y2K readiness;
but can not be assured that we will be  successful  in finding such  alternative
suppliers,  service  providers and  contractors.  We do not  currently  have any
formal  information  concerning  the status of our  customers  but have received
indications that most of our customers are working on Y2K compliance.

Risks  Associated  with Y2K We believe  the major risk  associated  with the Y2K
Issue is the ability of our key business  partners and vendors to resolve  their
own Y2K Issues. We will spend a great deal of time over the next several months,
working closely with suppliers and vendors, to assure their compliance.

Should a  situation  occur  where a key  partner  or vendor is unable to resolve
their Y2K issue,  we will be in a position to change to Y2K  compliant  partners
and vendors.

Cost to Address Y2K Issues Since we are in the unique position  implementing new
enterprise wide business  solutions to replace  existing manual processes and/or
"home grown"  applications.,  there will be little, if any, Y2K changes required
to  existing  business  applications.  All  of  the  new  business  applications
implemented (or in the process of being  implemented in 1999) are represented as
being Y2K compliant.

We  currently  believe that  implementing  our Y2K Plan will not have a material
effect on our financial position.

Contingency  Plan We have not  formulated  a  contingency  plan at this time but
expect to have specific contingency plans in place prior to September 30, 1999.

Summary We anticipate that the Y2K Issue will not have a material adverse effect
on our financial  position or results of operations.  There can be no assurance,
however, that the systems of other companies or government entities, on which we
rely for supplies, cash payments, and future business, will be timely converted,
or that a failure to convert by another  company or government  entities,  would
not have a  material  adverse  effect on our  financial  position  or results of
operations.  If third party service  providers  and vendors,  due to Y2K Issues,
fail to provide us with components,  materials,  or services which are necessary
to deliver our services and product offerings,  with sufficient electrical power
and transportation infrastructure to deliver our services and product offerings,
then any such  failure  could have a material  adverse  effect on our ability to
conduct business, as well as our financial position and results of operations.

Interest Rate Risk

Our exposure to market risk for changes in interest  rates relates  primarily to
the  increase or  decrease  in the amount of interest  income we can earn on our
investment  portfolio  and on the increase or decrease in the amount of interest
expense we must pay with respect to our various  outstanding  debt  instruments.
The risk associated with fluctuating  interest expense is limited,  however,  to
the exposure related to those debt  instruments and credit  facilities which are
tied to market rates.  We do not use  derivative  financial  instruments  in our
investment  portfolio.  We ensure the safety and  preservation  of our  invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in safe and high-credit quality securities.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk.
          Not applicable.

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.  Not applicable.

Item 2.  Changes in Securities.  Not applicable.

Item 3.  Defaults upon Senior Securities.  Not applicable.

Item 4.  Submission of Matters to a Vote of Security Holders.  Not applicable.

Item 5.  Other Information.  Not applicable.

Item 6.  Exhibits and Reports on Form 8-K.

         (a) Exhibits

             Exhibit 27 - Financial Data Schedule

         (b) Reports on Form 8-K


             On January 26, 1999,  the Company  filed a Form 8-K reporting the
             issuance of $12 million of the  Company's 9% Senior  Subordinated
             Convertible Notes due January 1, 2001.



<PAGE>




                                   SIGNATURES


Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

SOFTNET SYSTEMS, INC.



/s/ Douglas S. Sinclair
-----------------------
Douglas S. Sinclair
Chief Financial Officer


Dated:  February  16, 1999